The rise of Netscape

Editor’s note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we turn to a July 1995 item on the rise of a world-changing internet startup that would eventually pull off a blockbuster IPO: Netscape.

By Alison L. Sprout

FORTUNE — Behold the power of a visionary scorned. In February 1994, Jim Clark, then chairman of Silicon Graphics, the computer workstation company he founded in 1982, quit in disgust. He had failed to persuade senior colleagues at the thriving company to speed up plans to make low-cost, high-volume hardware for the much-ballyhooed information highway — a move he considered critical to Silicon Graphics’ long-term survival. “I got tired of pushing against an immovable object,” says Clark, 52. “I felt like I wasn’t having any influence.”

But after he left, Clark didn’t know what to do with himself. At first he thought he might create a company to design software to provide interactive television services via phone lines or cable. But as he sniffed around, Clark was pulled in by another vehicle for delivering data — the Internet. The Internet had two advantages over the “hypeway.” One, it existed; and two, millions of people were scrambling to get connected every year. Intrigued, Clark sent E-mail to Marc Andreessen, a recent graduate of the University of Illinois who had created Mosaic, the hottest software on the Net. By April the two had formed Mosaic Communications, rechristened last November as Netscape.

For Clark, the partnership was a chance to start over; for Andreessen, 23, it was a once-in-a-lifetime opportunity to form a company with a Silicon Valley legend. Says he: “In Illinois starting a company seemed like sort of an unnatural act.”

Clark put up $4 million to set up shop in Mountain View, California, and hire most of Andreessen’s University of Illinois colleagues. The “browser” software the team had invented enables mere mortals to point-and-click their way around the World Wide Web, the subset of the Internet where interactive documents that can include text, photos, and sound are connected by hypertext links. Such links allow users who click on a word in one document to jump to a related piece. The university gave Mosaic away as a public service, and in so doing introduced millions of people to cyberspace.

Andreessen and crew set out to capture these newcomers by developing a “Mosaic killer,” a souped-up version that would have all the qualities the original lacked: built-in security, speed, and the ability to handle sophisticated graphics. Netscape decided that it too would give its browser away-the company’s strategy called for back-end products that would capitalize on the browser’s popularity and Mosaic’s eclipse.

Navigator, as Netscape’s browser is called, made its debut last December. Seven months later two-thirds of the nine million browsers used on the World Wide Web are Navigators, according to Dataquest, a San Jose research firm. Even if you use another browser, it’s hard to surf the Web these days without running into Netscape. Many popular sites on the Web, including Yahoo (a directory and search service) and Ventana Online (a virtual computer bookstore), have links to Netscape’s corporate site, where you can download Navigator, check out what’s cool-and order a new version of the program that costs $39 and entitles you to customer support.

Netscape has grown nearly as fast as its product. Last April the two founders and an assistant were the only employees. As Fortune went to press, the head count had reached 220. In January, Clark brought in Jim Barksdale, who quit as CEO of $2.3-billion-a-year McCaw Cellular, AT&T’s wireless services division, to become Netscape’s CEO. That frees Clark to evangelize about the Net and gives Andreessen time to dream up products. Growing fast makes for great hype — but how has Netscape made any money when it has given away its most popular software? By charging hefty fees for programs called Web servers. Web-server software lets companies create interactive documents known as “home pages,” which give access to a host of information. Customers use Netscape servers in different ways. On the World Wide Web, they set up virtual stores, offer publications, and advertise their products. Meanwhile, Sun Microsystems, Lockheed Martin, and other major companies have begun using Web servers internally, as a way for employees to share information on their corporate networks.

Netscape charges $1,495 for an entry-level server; adding the ability to handle secure credit card transmissions bumps the price up to $5,000. Specialized servers that can handle databases of online customers cost $50,000. The market for World Wide Web servers is small but promising: Forrester Research in Cambridge, Massachusetts, estimates that it will grow from $5 million this year to $644 million by the year 2000.

By then, Netscape wants to be the one-stop shop for handling business transactions on the Web. Says Robert Hertzberg, editor-in-chief of WebWeek: “They are setting themselves up to be the software infrastructure for the Internet-the bricks and mortar.”

Companies that use Netscape servers to do business on the Web can host customers running any kind of browser. But those with Navigator get special service. Let’s say you want to buy a bathrobe from Hammacher Schlemmer at marketplaceMCI, an electronic mall. With Navigator you just type in your credit card number, and the transaction is protected by Netscape’s special encryption technology. If you’ve merely got Mosaic, you must send in your number via Internet E-mail-which is even less secure than reading your number over the phone to some stranger at the other end. Another customer is Wells Fargo, which uses Netscape servers to let customers with Navigator browsers check their account balances and transactions. Publisher Knight-Ridder delivers the complete text of the San Jose Mercury News daily to a Netscape server that has become one of the Web’s most popular sites.

Netscape has lured bigtime partners and investors. In April, Adobe Systems, Hearst, International Data Group, Knight-Ridder, TCI, and Times Mirror joined forces to purchase an 11% stake. The group’s advisory council meets quarterly to advise Netscape on products that publishers need for online success. Bank of America and First Data Corp., a clearinghouse for financial transactions, helped Netscape design its process for handling credit card purchases. In addition, Clark has inked marketing or technology agreements with Internet service providers Pacific Bell and Delphi, a division of Rupert Murdoch’s News Corp.; MasterCard; and networking leaders Digital, Novell, and Sun Microsystems.

These last three agreements offer a glimpse into Netscape’s future — and suggest how the company may touch your life even if you never leave the safety of your corporate network to surf the World Wide Web. Despite the buzz it has created on the Internet, Netscape makes most of its money selling browsers and servers to companies that create internal Webs as a way of sharing information. At Sun, for example, employees use more than 500 Web servers, including many with Netscape software, to pass along things like engineering plans and organization charts. Using Navigator, any employee can read such documents and click on key sections for access to related articles, which might be on the same server or elsewhere on the network.

In other words, an internal Web is a rudimentary form of corporate groupware — a poor man’s Lotus Notes. And Notes, mind you, is the main reason IBM is willing to pay $3.5 billion for Lotus. Says Jerry Michalski, managing editor of industry newsletter Release 1.0: “Internal corporate networks are going to be a huge use of Web technology. The next generation of client-server applications is being designed there.”

Dozens of companies have opted for internal Netscape setups. The technology is promising enough that Novell, the leading provider of software for local area networks, is making sure that its products work withNetscape browsers and servers.

Netscape isn’t counting on Novell alone. Andreessen and colleagues have created servers that work with Microsoft NT, the primary challenger to Netware, Novell’s network software. They are also working closely with Digital, which is equipping its salespeople’s laptops with Navigator so they can easily tap into the company’s internal Web servers while on the road. The two companies are collaborating on a project to let other businesses have similar access.

Netscape has enjoyed a heady first year — but now it will have to fight off competitors to maintain its position as the leading commercial provider of browsers and software for Web servers. The company has only one real rival on the server side: Open Market, in Cambridge, Massachusetts (see following story). So far, Open Market has been more of a consultant than a software developer — its business to date has consisted mostly of building custom-designed World Wide Web sites for clients like Time Warner and Conde Nast, complete with record-keeping and bill-paying services. But Open Market recently came out with a stand-alone server that could compete with Netscape’s. A bigger threat may be Microsoft. The software giant will offer an enhanced version of the original Mosaic as an option with Windows 95. Servers may not be far behind-the upcoming Microsoft Network is expected to offer access to the World Wide Web. A Microsoft official will say only that making a commercial Web server “would be a smart thing to do.”

The browser market, too, will likely get far more competitive than it is now. Online-service providers like America Online, CompuServe, and Prodigy already offer other browsers to their millions of subscribers.Netscape is fighting back by adding more and more features to Navigator. It has licensed from Sun a programming language called Java that will run live applications such as updated stock prices and animated advertising. A deal with Macromedia, the leading creator of software for multimedia developers, will allow Navigator to play certain games and programs originally designed for CD-ROMs that will soon be offered on Websites.

Indeed, the lowly browser, which has been so instrumental in hyping Netscape, could play a big role in the company’s future. As more and more homes get connected to cable and telephone lines with greater bandwidth, a good front end that allows them to navigate between the text, video, graphics, and sound to be delivered will be in high demand-software that’s a lot like Netscape Navigator. “The next step is interactive video on demand,” says Clark, “and Netscape will be there.”

Hmmm. Sounds like Jim Clark may not have given up on the interactive TV business after all.

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